Court of Appeals Stokes Blue Pencil Doctrine

Ah, competition–the sports drink of the free market! Even so, on a commercial level, our society imposes restrictions on competition in many ways, from garden variety restrictive covenants in commercial transactions (e.g., confidentiality and non-solicitation clauses) to laws proscribing “unfair and deceptive” practices, which is analagous, to continue the sports analogy, blood-doping for business. See, for example, the latest alleged corporate doper (and by all means file a claim).

Now, a recent Court of Appeals decision on the enforceability of noncompete clauses in North Carolina will once again change the scrimmage line on competition in connection with the sale of businesses. In Beverage Systems of the Carolinas vs. Associated Beverage Repair, LLC, an important case of first impression for non-compete clauses, the the Court of Appeals held that parties to purchase and sale agreements containing non-compete restrictions, through proper drafting, can empower trial courts to freely “blue-pencil” the restrictions in their agreements to the limits the law allows as opposed to striking offending clauses altogether.

Unlike many states, North Carolina law adheres to a “strict blue pencil doctrine,” which means that “[w]hen the language of a covenant not to compete is overly broad . . . [a] court at most may choose not to enforce a distinctly separable part of a covenant in order to render the provision reasonable. It may not otherwise revise or rewrite the covenant.” Id. In other words, North Carolina law limits the power of courts to bring overly broad non-compete agreements into compliance with the law. In contrast, many states recognize the power to freely blue-pencil as inherent with the discretion of trial judges.

The resulting legal irony of course is that in North Carolina, without a true blue penciling ability, courts are often bound to strike offending or unreasonable restrictions leaving the parties free to compete—a result materially at odds with the original intent of the parties. North Carolina’s refusal to recognize the doctrine has even lead to some creative (even silly) contract clauses in which parties, fearful of having their restrictions stricken by the court, provide in their contracts a list of similar restrictions in descending order of scope and breadth with the hope that if the court were to find the broader restrictions unreasonable it would at least have some lesser restrictive “choices” to enforce.

After Beverage Systems, however, the landscape will change. Parties that expressly grant the trial court discretion to blue-pencil their non-compete agreements—what the court refers to as a veritable “private” blue-pencil doctrine—can stoke life into the doctrine and expect to have their restrictions enforced, at least to the limits the law (i.e., court) allows. All that is required now is for agreements containing non-compete agreements to expressly grant this right. To this last point, in distinguishing the Beverage Systems case from a traditionally strict blue-pencil case, the court explained: “However, the trial court had authority to enforce the non–compete through paragraph six of the non–compete which specifically and expressly gave the trial court authority to ‘revise the restrictions . . . to cover the maximum period, scope and area permitted by law.’ In other words, the trial court’s ability to revise the non–compete is not subject to the restrictions of the ‘blue pencil doctrine’ which prohibits a trial court from revising unreasonable provisions in non–compete agreements. Instead, here, the parties included a specific provision in the non–compete —specifically, paragraph six—enabling the trial court to revise the non–compete.” Id.

Alas, the blue-pencil doctrine is alive and well in North Carolina, but only if the parties remember to include the enabling language in their contracts. It remains to be seen, however, whether courts faced with similar private blue pencil clauses in employment contracts will be similarly enforced, as the courts rationale in Beverage Systems appeared to be based, at least in part, on the fact that the contracts at issue were “pursuant to the sale of a business” and between parties who stood “at arms-length with equal bargaining power.”

In any case, the decision signals a continuing trend towards freedom of contracting and a loosening of restrictions in the area of non-competition clauses in North Carolina, which this firm has written about before.